The Demand Solutions Blog

I often think of the economy as a metaphorical set of pipes with money (the "water") flowing through them. Recessions typically happen when the pipes "clog," causing the water to flow well below its normal pressure. Governments have to respond, taking actions to "unclog" those pipes to get the "water" flowing again.

But the recession I believe we've already entered is very different in kind, not just degree. The coronavirus pandemic has forced large sectors of our economy to close down, severely restricting consumption and economic activity. This time, the "pump" has broken. It may not matter how much anyone tries to unclog the pipes, as little will flow until the pump starts working again.

This metaphor has some significant ramifications for what we'll experience over the next few months (yes, months, not weeks). It feels like we will have a two-stage recession:

• Stage 1 will be unlike anything we've ever encountered before. This is the current stage, where the pump is frozen. Many industries will experience an inability to stimulate demand no matter what they do. For example, Las Vegas casinos are not allowed to do any business and thus can't even make an offer. Airlines can cut prices to practically zero, yet very few people will fly. Normal pricing and revenue management actions like lowering the price to boost occupancy simply won't work the way they typically might.
  
  
• Stage 2 will be more like a typical recession, where weak demand meets excess capacity until supply and demand rebalance. Government stimulus will drive investment and demand and slowly, but surely, the engine roars back to life. Whether this will be a "V shape" like typical recessions or a shape more like the balance sheet-driven "Great Recession" is hard for me to predict (I'm an engineer, not an econometrician). But whatever it will be and however long it takes, it will mark the process by which we get back to "normal."

I’m writing this sitting on an airplane wondering whether this week will be the last week I travel for quite a while. As the level of fear (dare I say panic) continues to rise, we’re bombarded with exhortations to wash our hands frequently (easy to do), stop touching our face (virtually impossible, just try to do so for even 15 minutes) and dispense with handshakes, hugs and even standing within 6 feet of one another. While I keep telling myself (and I fervently believe) “This, too, shall pass,” I can’t help feeling a sense of anxiety driven by the uncertainty of it all.

To relax, I open up the latest edition of The Economist and as I read along, I come upon the “Schumpeter” column (Economist readers will recognize that as the regular column in the Business section).

Titled “Plan V,” the teaser copy says, “Covid-19 is foisting change on business. Some of it may be for the better.” One of the key elements of the article is about how companies are responding to the virus risk by encouraging (often requiring) that associates telecommute, in many cases as a “test” for contingency plans and in some cases (e.g. Seattle) as a strategy for arresting the pace of new cases. This dovetails with a story I heard on NPR driving to the airport discussing the same thing.

Both NPR and The Economist make the argument that this could be an unexpected, but possibly positive, long-term impact from the virus. The latter points out that British and American firms pay on average $5,000 per employee on rental costs despite only 40-50% of desks being used during working hours.  They suggest that employers may find an increase, or at least no dip, in productivity and thus change working patterns in perpetuity.

(This is the third blog in our current series on amenity pricing)

It’s a classic conversation that will be familiar to every revenue manager who has ever had rehab units in their portfolio:

Property Manager: “I need to lower my one-bedroom prices”

Revenue Manager: “Ok. What, exactly, makes you feel that way?

Property Manager: “I’ve got a few units that have been sitting vacant too long”

Revenue Manager: “Anything those units share in common?

Property Manager: “Yeah, they’re the units we’re doing the rehab on.

Revenue Manager: “Ok. Then we really need to reduce the upcharge for the renovation on those units, not reduce the price on all 1-bedroom units”

Property Manager: “I can’t do that!” “Then I won’t get the ROI I need on those rehabs!!”

We have told that story many times, and every time we tell it to a revenue manager (or group of revenue managers), we get that immediate, knowing smile.  Yet despite this familiarity, this script keeps repeating itself. Why? And what can we do about it?

A couple of months ago, I read a blog about multifamily sales. It caught my attention because the title referred to closing as "the bottom line." Those of you who read this blog frequently know that not only do we regularly write about how to improve sales performance, but we also do so from a contemporary point of view based on science and data behind successful sales/leasing.   

Our views are influenced by the seminal research by Matthew Dixon and Brent Adamson in the Challenger Sale, as well as anthropological research on how prospects actually buy. The hook (in the blog) of closing as the bottom line struck me as being completely out of sync with this modern approach. It was reminiscent of the "always be closing" approach that influences many people's idea of sales. This approach - brilliantly satirized in Glengarry Glen Ross - has been clearly debunked by Dixon and Adamson as well as other authors (e.g. Daniel Pink) in favor of much more prospect-centered approaches.

Last week, we talked about how unit amenity pricing is the most common place to uncover hidden NOI in multifamily rental operations, and we covered the various reasons why amenity opportunities present themselves.

Unit amenities are a simple concept, at least in theory.  However, experience shows that the practice is a lot more challenging. So, let’s explore a few of the reasons that finding missing amenities is more difficult in practice than in theory.

1. It takes a concerted effort. Finding missing amenities is not like finding trash along the tour path. Associates must make must review and understand the configuration of the PMS and purposefully evaluate that against what they see in the property. It takes a combination of looking at site maps, Google maps and physically visiting buildings and units. It’s rare that one just stumbles upon the obvious.

I toyed with a “New year’s resolution” post, to welcome the new year, but as 2020 gets underway there’s something that we at D2 are really excited about. As multifamily housing operations specialists, we’re constantly looking for ways to eke out just a little more net operating income (NOI) for our clients. Can we get a few dollars more rent or reduce expenses by a few bucks? It’s a never-ending challenge, and anyone who’s been doing this for a few years knows how hard it is to keep finding those dollars.

But rather than the few bucks in expense savings, right now we’re preoccupied with the few hundred dollars a month that - for almost all multifamily communities - are just sitting there waiting to be plucked. Sounds too good to be true, doesn’t it? There simply can’t be a simple way to generate better NOI or we would have already done it, right?

After more than 20 years in the industry working with operators who manage more than 1.3 million units, we can tell you that if you are running multifamily properties you are probably sitting on at least a couple of hundred dollars a month (and maybe thousands) in incremental revenue.

The culprit? Drum roll, please…incomplete and/or inaccurate unit amenity configurations!

I was recently moderating a panel on short-term rentals (STRs) at the Indiana Apartment Association’s Multifamily Industry Summit, and a question came from the audience about the implications of Government Sponsored Enterprise (GSE) policies regarding STRs on the ability of owners to have as liquid a funding and sale market as possible.

This is a question that occasionally comes up in other STR panels and discussions though surprisingly not as often as one might expect. When I first heard this question in 2017, I did some research in early 2018 on this subject; and somewhat coincidentally, I had just updated this research following conversations leading up to NMHC’s OpTech.

First, let me say that our work and experience is completely on the operating side. Neither my team nor I have extensive experience in the financing side of the business. So everything here is a) the result of research into an area a bit out of our sweet spot and b) meant to start a conversation should anyone out there have information more contemporary and/or more accurate.

As we head into the holidays, I hope everyone has some time planned for family, fun and just winding down a bit. Taking a lesson from Stephen Covey’s “7 Habits,” we at D2 Demand really believe in life-work balance to “sharpen the saw.” This balance was on our minds this week as the growing D2 team followed its end-of-year meeting with our now-annual holiday party with our friends at Linnell-Taylor and Après Creative, this year held at Unser Kart Racing. 

Amid the holiday festivities, it’s easy to forget some of the pitfalls of year-end in multifamily. One of the most obvious is the traditionally-sluggish demand for apartments that tends to accompany buoyant demand for socks, items from the Williams-Sonoma catalog and the like.  

November and December always carry the risk of panic pricing reactions and concessions, and more broadly of the self-fulfilling prophecy that “we don’t sign leases at this time of year.” With marketing budgets having dried up months ago (like *enter the name of the child’s gift you can’t find anywhere*) year-end can be a leasing funk.

As we head into the winter months, it’s normal to think about slopes - especially if you live in Denver, as I do.  Denver is famous, amongst other things, for both skiing and multifamily leadership, and the “slopes” that we find ourselves discussing with multifamily leaders at this time of year are the profiles that describe a property’s lease expirations.

Lease expiration management (LEM) is particularly timely now as we lease December/January move-ins, soon moving on to February (which many are already sending renewal offers for) and then March. Now is the time where we get to move expirations out of undesirable expiration months into more desirable months. 

Miss your targets in the next few months, and you’ll have to wait another year to try to fix that pain. It should be simple enough, right? We know there’s seasonality, so we know what good and bad months for expirations are. All we need to do is stop signing leases with bad expirations and only sign leases with good expirations. As my good friend and former colleague now at RealPage, Rich Hughes would say, “Done and done,” right?

There's been a lot of talk of downturns lately in Pricing and Revenue Management (PRM) circles. It was a major theme of the recent NAA Maximize conference and was also covered at NMHC OPTECH last week. While no one knows when the downturn is coming, everyone seems to agree that it's a good idea to plan for it. While occupancy and rent growth are still strong, the sheer length of the recovery since the last recession has everyone wondering how much longer this bull run can last.